Public Bill Committee

[Mr Jim Hood in the Chair]
Written evidence to be reported to the House
PS 09 PayPoint plc
PS 10 TNT Post UK Ltd
PS 11 The Co-operative Group
PS 12 RAPP
PS 13 Consumer Focus

The Committee deliberated in private.

On resuming—

Witnesses: Mike O’Connor, Chief Executive, Consumer Focus, Robert Hammond, Head of Post and Digital Communications programme team, Consumer Focus, Andy Burrows, Principal Policy Advocate in Community and Public Services programme team, Consumer Focus, and Mark Lyonette, Chief Executive, Association of British Credit Unions (ABCUL), gave evidence.

Jimmy Hood: We will now hear oral evidence from Consumer Focus and the Association of British Credit Unions Ltd. For the record, could you please introduce yourselves to the Committee.

Mike O'Connor:  First, thank you for inviting us. My name is Mike O’Connor, and I am chief executive of Consumer Focus. I am joined by, directly on my left, Robert Hammond, who is head of our post and digital communications team, and, next to him, Andy Burrows, who is the principal policy advocate in our community and public services team.

Mark Lyonette:  I am Mark Lyonette, and I am the chief executive of ABCUL, the Association of British Credit Unions Ltd.

Robert Hammond:  I am Robert Hammond, and I am head of the post and digital communications team at Consumer Focus.

Andy Burrows:  I am Andy Burrows. I am the principal policy advocate in the public and community services team, with responsibility for the post office network.

Jimmy Hood: Before calling on the first member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill. We must stick strictly to the timing in the programme motion that the Committee has agreed. I hope that I do not have to interrupt mid-sentence, but I will do so if need be.

Q 174174

Gordon Banks: How strong are the Bill’s provisions for protecting consumers? Link your answer to the universal service obligation, which from the point of view of many consumers is a legitimate thing to protect.

Mike O'Connor:  The main debate concerning the Bill is on privatisation. We believe that consumers can get a fair deal whether the Royal Mail is in public or private hands; we can also get a bad deal in either the public sector or the private sector. The Government have decided that the private sector is the best option. The challenge as we see it is to ensure that consumers get a fair deal in that new world. We are concerned that there are elements of the Bill, especially on the regulatory regime, that could mean that consumer protection is diminished. We ask Parliament to ensure that those provisions are strengthened so that consumers do not lose out.
In general, there is a lot in the Bill that we welcome. In particular we recognise the benefits of separating the post office network from Royal Mail. There are risks, especially for rural communities, at a time when the post office network has had to go through quite significant changes to its business model. Provided that there are adequate safeguards in place, we believe that a separate Post Office Ltd will be better placed to meet the challenges of what is a vital, but ailing, British institution.
We are glad to see support in the Bill for the universal service obligation, which we regard as a fundamental concern for consumers. As the body set up by Parliament to protect consumer rights in postal and other markets, we have done a lot of research among consumers, and we have found that the universal service is still highly relevant and much valued.

Q 175

Gordon Banks: I wonder if I could follow up on that with two points. You mentioned that there are some provisions in the Bill that you think would potentially reduce consumer protection. It would be great if you could expand on that. Secondly, you welcomed the separation of the Post Office and Royal Mail. Could you comment on how important you think the inter-business agreement and getting longevity on it would be in ensuring that post offices survive and that consumers will therefore be protected by having facilities close at hand?

Mike O'Connor:  I shall deal with the last point before handing over to my colleagues on how consumer protection may change in the new world. The inter-business agreement constitutes one third of the income of post offices, and it is clearly an essential part of their business. Whatever happens going forward, even if this Bill did not exist, we would have to do something to make the post office network more viable and more valued by consumers, so it has to go through a significant change. We are concerned that if the inter-business agreement falls away it will be badly damaged, so we would like to see the inter-business agreement survive as long as possible.
Clearly, you cannot force a private sector company to always do business with the post office network. I was glad to see that Moya Greene could not envisage a situation in which they did not work with the post office network. I can envisage such a situation in the future. Clearly, that can only happen when Post Office Ltd is more able to stand on its own feet, so we would like to see that arrangement last as long as possible. We would also like to see provisions in the Bill that define the number of access points—the distribution of access points—with which Royal Mail must deal to support. We don’t want to rig the market, but we want to see consumers having security about access points, so we would like to see more in the Bill about that.
We are unclear, and we would value guidance and something in the public domain, about how long you can impose such an agreement. We do not know whether it is five years or 10 years. The longer the better from our point of view, but we do not yet know.
In terms of the changes to consumer protection, there are many hard-won elements of consumer protection in the current system, mainly in the licence agreements. These will fall away, and many of the statements in the Bill about what the regulator, Ofcom, can do are in terms of “Ofcom may.” We would like to see instances of “Ofcom must,” and my colleague, Robert, will enumerate two or three areas in which it should be a “must”.
We would also like to see provisions whereby Royal Mail must provide information. At the moment, they must provide it to Consumer Focus. We would like to see, in the new world, transparency such that they must provide it to us or to our successors in the future. Robert, could you talk about the areas in which we see changes?

Robert Hammond:  We are primarily concerned about the lack of continuity. The idea is that, as the new regime beds down, substantially the existing licence conditions roll over into the new world. That is absolutely understandable and fine, but schedule 9, paragraph 4 to the Bill actually allows for the exclusion of the consumer protection provisions, which is very worrying indeed for us. As Mike as mentioned, in various aspects of the current regime, either Royal Mail or other postal operators have to do something but in the new regime, that is entirely a discretionary matter for Ofcom to decide. Some examples are in the areas of complaint handling and redress, which we think are fundamental to consumers’ rights. They are also enshrined at an EU level in the directive, and we have some concerns about how that is viewed in the Bill as drafted.
There is also, as Mike has alluded to, the provision of information. We are entitled to receive, and do receive from Royal Mail, as part of their licence condition, figures about mail integrity, which is basically the security of the mail—mail that gets damaged, lost or stolen. It is on a highly confidential basis, but it enables us to examine those figures in quite a lot of detail, to have bilateral discussions with Royal Mail and to sort out any areas in which we feel that a bit of a problem may be emerging.
We also get information regarding delivery and collection exceptions, where either consumers do not wish to receive mail or Royal Mail is not prepared to go and deliver. Particularly in remoter areas, that can be quite an issue. We receive details on that, which we closely monitor. We advocate on behalf of affected areas, and we try to liaise with Royal Mail to find a suitable solution. Going to the regulator is the very last option, and by and large we are successful in our bilateral conversations with Royal Mail.

Q 176

Damian Collins: My questions are principally directed to Mark Lyonette, but I welcome comments from any members of the panel. There are already some credit union transactions taking place through the post office network. What are your views on the Bill in relation to the way in which the Post Office and Royal Mail can work with credit unions? Do you think there is an opportunity to extend the option of using credit unions through the post offices?

Mark Lyonette:  Yes. That is primarily our purpose in giving evidence today. We haven’t studied in detail all of the Bill’s provisions, and we are not a source of expertise on consumer protection per se, but we think this really is an opportunity for the Post Office. We understand that the Bill requires the Post Office to report on who they are serving, and at the moment we are concerned that many of the financial services available through the Post Office are actually very mainstream financial services; it’s a partnership primarily with Bank of Ireland.
We recognise that the Post Office is a vital institution. Many of the 22 million people who use the Post Office each week aren’t able to access mainstream financial services, particularly unsecured personal loans, through Bank of Ireland. We would like to see some thinking—we know that the coalition is engaged with this—on how the Post Office could be opened up, which would help the credit union sector to gain the scale that many MPs, from all parties, would like to see. That would also help the Post Office itself by increasing transaction revenue.
We have evidence from Pollok in Glasgow, where a credit union and a post office are already working closely together, that footfall for both entities went up when they collocated and started to share staffing, and so on. So we think that there is a great opportunity, although perhaps there should not be an obligation, for the Post Office to ensure that, with the public subsidy that it receives, it is able to serve many of the people on the lowest incomes, who are not particularly well served by the commercial sector.

Andy Burrows:  That is something that we would absolutely endorse. Our research shows very clearly that many consumers on low incomes, and many unbanked people, strongly trust the Post Office and would be interested in a wider range of banking products aimed at their needs. That would, of course, deliver a step change for credit unions, and the benefits for financial inclusion could be considerable indeed.

Q 177

Damian Collins: In Consumer Focus’s submission to the Committee you touched on the future relationship between Post Office Ltd and Royal Mail, should the Bill be passed. The submission particularly said:
“There are strong arguments against seeking to maintain the contractual relationship between Post Office Ltd and Royal Mail for perpetuity.”
You touched on that earlier, but could you say a little more about it? You said in your submissions that in the short term it is very important that that relationship exists to help support post office branches that are not financially viable on their own. I am interested that you do not think that the relationship should stay in place in perpetuity; so what are your views for the longer term?

Mike O'Connor:  Well, I don’t think that it can stay in place in perpetuity. Royal Mail may be a private company, and I don’t think you could force them to do business with a particular range of outlets. They have to have commercial freedom eventually to go and do a deal with someone else, but that, we hope, will be quite a long way in the future, because the change in the business model that Post Office Ltd must go through in order to be sustainable is really quite significant and they need as long a period as possible when they have that significant income. So we are not saying that it has to be there for ever, but we want as long a time period as possible.
We also want to ensure through the Bill that the universal service provider, Royal Mail, has to meet certain conditions on access across the country, so that there must be x outlets and a certain distribution. Without such requirements, there is a danger that Royal Mail could cut out Post Office Ltd at some future stage and do a deal with someone who offered a smaller and—as far as we are concerned—inadequate number of outlets. We are very conscious that the majority of post offices are in rural areas and perform such a vital function that we would like to see some protections in the Bill to ensure that in future, although Royal Mail will not have to do business with Post Office Ltd, they have to do business with someone who offers the same scope and distribution currently offered by Post Office Ltd.

Q 178

Nia Griffith: Continuing that point, I think there are two aspects to this. First, what number of outlets would you be looking at—because we know that only about 4,000 post offices are financially viable—in order to provide proper access, a proper cover of the country? Secondly, how do you see that being put in the Bill? Do you simply want to see something about the number of outlets, or do you want to see something stronger? You have talked about trying to have a stronger indication, beyond the warm words of Moya Greene: “Oh, yes, well of course we’ll use the post offices.” What sort of stronger provision could you have that would make an agreement stick in the long term?

Mike O'Connor:  We recognise the difficulties in having a piece of legislation stating that there must be 22,000 or 12,000 post offices for evermore, so we will need a certain amount of flexibility in that. I shall ask Andy to deal with that point.

Andy Burrows:  It’s probably important to recognise that at any one time there will be a certain proportion of the network where branches are temporarily closed, so it would not be practicable, in terms of implementation, to specify the exact number of outlets that are open today, but it would certainly be possible in the first instance to look at introducing a measure that reflected current provision, albeit with a cushion that allowed for ongoing, business-as-usual—if I may put it like that—network change.
We would also consider it desirable to bolster the existing Government access criteria for post office provision and to see those reflected in the Bill. Those could certainly be constructed in such a way that they align closely to existing levels of post office provision. That would mean that the Post Office would be very well placed to bid for that work in future and would reflect the considerable importance of the post office network’s being able to offer universal reach. When we are talking about the mails contract, obviously in the first instance we are talking about the importance of universal access to mail services, but anything that could compromise the integrity of the post office network obviously brings into play wider services of social and economic interest that it currently delivers.

Q 179

Nia Griffith: So, you would like to see written into the Bill something similar to the requirement that 90% of people live within a mile or whatever of a post office?

Andy Burrows:  Yes. Post Office Ltd comfortably exceeds the existing Government access criteria, so those could be bolstered to reflect current levels of post office provision.

Q 180

Nia Griffith: So, you would like the access criteria to be strengthened?

Andy Burrows:  Yes.

Q 181

Nia Griffith: You would like the access criteria to be higher than they have been, as you put out in the document on Tuesday, and formally formulated next year?

Andy Burrows:  Yes. If the network was cut on an arithmetic basis, the current access criteria could actually be met with around 7,500 outlets, and there are just under 11,900 outlets today, so there is certainly scope to bolster that.

Q 182

Nia Griffith: Then you would say that that is the way to preserve an inter-business agreement with the Post Office, because it would be quite difficult for them to find other outlets that would actually provide the same level of access for consumers?

Andy Burrows:  Yes.

Q 183

Nia Griffith: Is that sufficient in terms of an agreement? Should there be something stronger?

Andy Burrows:  Well, on the basis that it would appear difficult to require Royal Mail, as a separate company, to be in a contractual relationship with Post Office Ltd in perpetuity, that would leave Post Office Ltd very well placed to win that contract in future.

Q 184

Nia Griffith: And you are effectively saying that you cannot actually put in legislation what a private company has to do in terms of whom it chooses for its outlets?

Mike O'Connor:  That is our understanding, yes.

Q 185

Michael Weir: In your submission to the Committee you state that 93% of businesses say they will always need to send some things by post. You also raise a concern later on that the definition of the USO does not include a packet delivery or a pick-up on a Saturday. Could you expand on that? Of these 93% of businesses, is there a split between how small and large businesses see Royal Mail? Again, with the packet delivery, is that a demand that comes more from small businesses or from any particular group?

Robert Hammond:  Consumer Focus recently completed a significant piece of research in conjunction with Postcomm that looked at consumer needs as opposed to their wants in terms of a universal service obligation. Clearly we all want a gold-plated service at next to nothing but in the real world that does not exist. So we have tried to tease out what consumers would accept as a postal service that reflects their needs and lifestyles today as opposed to the pre-digital age of years gone by. Some very interesting figures have come out. For example, in Scotland that percentage goes up to 99% of all businesses using Royal Mail to communicate with their customers and with other businesses. The picture is the same whatever part of the UK you look at. Whether it is Northern Ireland, Wales, Scotland or England, the universality of the need for a USO is clear.
It seems to us that the Bill could be missing a trick inasmuch as at the moment Royal Mail delivers letters Monday to Saturday and there seems to be some sort of option whether you get a parcel on a Saturday, but you will get it on a Monday to Friday. The problem is that most of our lifestyles preclude us from being at home when Royal Mail delivers during the week and more of us are turning to the internet now to buy goods and we need those to be delivered. So if we are not at home that inconvenience factor creeps in. To our way of thinking, if you are looking for a Royal Mail that puts consumers at the heart of its business and a Royal Mail that will seize the opportunities that are available to it—it is the first one to complain about how much business is being taken away through e-fulfilment—then to extend the delivery of parcels to Saturday would be a common-sense approach both for the consumer and Royal Mail.

Q 186

Michael Weir: I take it from that that you find both business and individual consumers have expressed a desire for a package delivery service on a Saturday?

Robert Hammond:  We did not explore it in that sense but we explored how people would feel about reducing the current level of the USO from six days to five days. Generally speaking, there was a degree of flexibility in how people felt about a five-day delivery. The one thing there is no agreement on is which day you would lose. Businesses are very keen to keep the weekdays. Domestic consumers, in particular, are very keen to keep the Saturday. That brings me on to another point. In any review of the USO, which obviously the Bill provides and that is a very sensible provision to include, a great deal more work will need to be done by Ofcom to tease out the differences and to weigh up and make a decision on these competing interests. That is vital. The work that we and Postcomm have done is the start; it is nowhere near the end.
Finally, at the moment any changes require consultation with a number of bodies. Postcomm must consult with us, other licence holders and so on. Again, that is absent from the Bill, and in terms of consumer protection, it is something that we would like to see put back in. We feel that it is perhaps something that is being lost. It is very important that the consumer voice is heard, just as it is for that of small businesses and indeed the bulk mailers.

Q 187

Priti Patel: In your submission you mention that the USO in its current form is sustainable for the immediate future. Earlier in the week, we heard evidence from the Mail Users’ Association and the Mail Competition Forum, and they were sceptical about the sustainability and viability of the USO. Do you think that the Bill goes far enough in safeguarding the USO? Do you have any concerns about its sustainability and viability in the long term?

Robert Hammond:  I think that in the long term, the USO has to change. We are probably all at one on that. The service that exists at the moment harks back to a time gone by, and it needs to be considered in terms of the lifestyles that we all lead. We are concerned about a knee-jerk reaction to change the USO that does not capture what people need from the service. The Bill obviously provides Ofcom with an 18-month period in which to carry out a review, and that is a timely period in which to do so.
Our concerns are about a sudden leap to curtailing the USO, without there being a thorough analysis of what people want and need from the service, the impact that it will have in terms of possible consumer detriment, and the effect on the model of Royal Mail and the businesses of other operators. It is no good our saying, for example, “Let’s go from six days to five days,” only to find that logistically, that does not make much commercial sense to Royal Mail. There must be a big slice of realism on both sides, and it is important that the consumer voice is at the heart of that. That is what will make Royal Mail sustainable.

Q 188

Priti Patel: Do you think that that is captured adequately in the Bill as currently drafted?

Robert Hammond:  No, I do not think it is. As I said in my answer to an earlier question, it would be useful to have tighter requirements in the Bill, like those that exist for consultation on changes to the USO. At the moment, what is provided for is a welcome step. It captures the six days a week, but there are options for a further expansion of the USO in the right way.

Mike O'Connor:  We think it is wise for the Bill to make allowances for changes to the USO. If there are to be changes, we are concerned that the process that Ofcom and the Government go through must be more transparent and inclusive, so that we take consumers with us.

Q 189

Gregg McClymont: May I go back to the issue of post office numbers? Is it your understanding that, as things stand, if the Bill proceeds, the only protection for post office numbers following privatisation will be the set of informal criteria that the Government have said they will retain?

Andy Burrows:  There are two things there. The Bill allows Postcomm to determine the sufficient number of access points that it would consider reasonable. For as long as the post office network was used to discharge Royal Mail’s function in that respect, that would be for Ofcom to determine. Other than that, it would just be the Government access criteria, which are currently not on a statutory footing.

Q 190

Gregg McClymont: If I understood your previous evidence, those criteria could be met by 7,500 post offices?

Andy Burrows:  Yes. That is being published in a parliamentary question. That would be if the network was to be cut on an arithmetic basis. So, obviously, there are criteria covering both rural and urban, and urban-deprived provision, but the figure provided by the previous Government was 7,500.

Q 191

Gregg McClymont: Do you think, for people who are worried about their post offices, that that informal non-statutory provision is adequate?

Andy Burrows:  Clearly, there is a big gap between a network of 7,500 outlets and current network provision today, and certainly it would be desirable to see additional safeguards to ensure that the provision and the distribution of post office services were much more closely aligned against existing provision. I think that would also be very helpful to ensure that Post Office Ltd, actively on the ground right now, are taking steps to ensure that where temporary closures happen, for whatever business-as-usual circumstances may arise, they would focus their minds to ensure that they are taking every step possible to look to plug any gaps in service right now.

Mike O'Connor:  I just add that Post Office Ltd believe that there is an appetite for the possibility of more post offices and we commonly come across consumers wanting a post office. So we think that there is a scope for more, not less, and we welcome the Government’s commitment to no programme of closures. But, fundamentally, whether we have more post offices is going to come down to whether they provide a service that people want enough to make them economically viable. So the challenge is not just about numbers, but about how they operate—whether they provide a good consumer service, if we can find business models that consumers like, and if we really do see more Government services provided through post offices. I have to say that our experience over the last period is that people talk about this, but that it is not really happening. In general, there is a tendency for Government to go away from face-to-face contact and do more and more online, so I really do want to see this Government commitment, and local government commitment, to putting more services through post offices. But the only way in which we are going to get more post offices is not really ultimately by legislation; it is about them being a viable model that people want. That is why a new business model, and reform of the network and what they do, is central to the future.

Q 192

Gregg McClymont: What you are saying is very interesting. Maybe a pithy way to put this is that it is a question of whether you can buck the internet. Would that be a fair way to characterise the challenge facing the post office network?

Andy Burrows:  We know, obviously, that most people love their post offices, but many people do not love the customer service that they get through them. Certainly, among the encouraging things in the announcements earlier on in the week were the measures that are designed to improve the flexibility of the customer experience—longer opening hours, for example. Post offices need to offer a service that is convenient and flexible, and meets the expectations of consumers. Obviously, there are service problems right now, particularly in the high street network, around queuing and quality of service, which actively deter many people from using post office services. Clearly, with the growth of the internet and other channels, that is a challenge and it is one of the reasons why there has been a decline in business and in footfall through the post office network. But certainly there is scope for the post office to take issues around customer service far more seriously and attack them far more vigorously, and for the proposition to be far more flexible and built around needs of consumers, than we have seen up to now.

Q 193

Gregg McClymont: Why do central Government and local government often not use the post office network?

Mike O'Connor:  I would suspect that it is largely around costs. In times when we are having to reduce public expenditure, the costs of providing services face-to-face is really quite high. But the importance of face-to-face contact, especially for those populations who don’t have easy access to the internet—and there will always be a significant number of people who don’t get access—the significance of providing a service for them means that we should invest in face-to-face and in that type of human help which the post office can give.

Q 194

Graeme Morrice: I am not sure whether I need to declare an interest in being a proud member of the Livingston credit union. I want to ask some questions of Consumer Focus, but I suppose, with the questioning that we have had already from Mr Weir and Ms Patel, that they have stolen my thunder to a certain degree. I was going to ask about the research that you have done with consumers. I think, to an extent, that you have adequately answered that in relation to the USO and whether people are relaxed with the six days going down to the five days.
May I ask you, in particular, about the commitment to provide, through first class, next-day delivery and about consumers’ views on price. It was suggested, in evidence given on Tuesday, that people were relaxed about next-day delivery and price.
You mentioned earlier that as an organisation you were quite relaxed about whether Royal Mail remains in public hands or becomes a private entity. What are consumers’ views on that, and on the future ownership of Royal Mail? Are people relaxed about its ending up in foreign hands, and about profits going into foreign countries?

Robert Hammond:  In relation to the research, we have found a large slice of flexibility from consumers. Consumers value the service, and the certainty that the service offers that they will get their mail intact when it is supposed to arrive. We did a series of trade-offs, asking people how they would feel if certain parameters were changed. Those included quality of service, price, moving from six to five days and abolishing the first and second class systems for a uniform price that delivered within two days as opposed to the current aim of first class being delivered within one day and second class within three.
There is certainly a degree of willingness by consumers to pay more for their mail to achieve those standards, although we found that once you reached the magical 50p, interest in the mail began to drop off. We heard announcements earlier this week that would allow Royal Mail, if it so chose, to put up first class mail to 46p. We are now beginning to nudge up towards that area where consumers are not going to be very happy about the cost of mail.
The next-day delivery is quite a burden for Royal Mail, because to achieve its 93.8% target it has to use a lot of aircraft to get the mail from one end of the country to the other. That is an expensive burden. It is our view—consumers were fairly relaxed about this—that if you were to move from a first and second class system to a uniform system that got mail there in two days, that could well be acceptable to consumers. Moreover, it would mean that Royal Mail could take out an awful lot of its expensive costs relating to air traffic in particular. That would have to be safeguarded by Royal Mail’s offering a next-day product, which would have to be sensibly priced, so that if people had something urgent that needed to get there it could do so.
As part of a series of strategic workshops that we held earlier this year, we were in Northern Ireland listening to the views of consumers and organisations. A number of the local authorities told us that they do not bother to send anything by first class mail any more. Everything goes by second class, but if it has to get there the next day—a rare occurrence—they would use special delivery, which enables them to achieve that. Those are the sorts of areas that Royal Mail should explore.

Mike O'Connor:  In relation to popularity of privatisation, I have seen figures that show that people are worried about privatisation. I think by and large people are fearful of change, but if, for reasons of making the Royal Mail and the USO sustainable, privatisation has to be the route—I hear what Royal Mail says about access to capital being easier in the private sector, although as a taxpayer I think it has had pretty good access to my capital over the past few years—we have to try to reassure consumers that in the new world they will get a better service; they will be as protected; they will have as many rights to access information; and they will have the same guarantees as they have now.
Our focus now is that if Royal Mail is going down the private road, we want to make sure that consumer protection is as strong as—hopefully stronger than—it is now. We are concerned that in the Bill, many of the consumer protections may not be delivered because it is peppered with things such as that Ofcom may require postal operators to have access to alternative dispute resolution when there are rows with Royal Mail. We think that those need to be converted to musts. If we can reassure the public that in the private world, they will get the same protection and a better quality of service, I think the public will accept privatisation.

Robert Hammond:  There is also a lot of confusion in the public mind, when we talk about the post, between the Post Office and Royal Mail. Often, people immediately think about the post office network, which is something that is very close to their hearts. It is important, in any debate about this, to separate letters and parcels and the post office network.
On the question of capital to Royal Mail, it is not only public money. Again, the increases that Postcomm has allowed Royal Mail to make earlier this week will raise another £280 million, which it says it needs for privatisation. It has had a lot of money—£2 billion before from the public purse and another £280 million here. The consumers are already, through the price control, paying some £300 million to Royal Mail to help it with its pension deficit. There is an awful lot of consumer and public money supporting Royal Mail. However, in terms of its desire to raise capital for the future, there has to be a sensible look at how much more modernisation Royal Mail needs to do. I am not saying that it does not need to do it, but it needs to be properly understood.
It is also right that Royal Mail is not allowed to use money that is raised through its trading activities, particularly around the USO, for merger and acquisitions activity in the markets. That was part of Richard Hooper’s original report. It does not seem to have the same prominence in his review, but it is our view that Royal Mail has already, at the beginning of the decade, ventured into the merger and acquisitions market and it made one or two good buys, but it made an awful lot of very bad ones. There is nothing out there at the moment that is desperately worth buying. It would be a great risk to the public if moneys they were paying for postage were used on frivolous activities.

Q 195

Graeme Morrice: I think, Mr O’Connor, that you were suggesting that privatisation was the only game in town. We all accept that we need to see a major capital investment into Royal Mail, but the trade unions and the work force would take a different view; certainly, based on the evidence given earlier this week, they would feel that privatisation should not necessarily be pursued. Have you taken the views of the work force and trade unions into consideration on this issue?

Mike O'Connor:  Working for Consumer Focus, I have to look to consumers and what is best for them. The trade unions have a role to look after the interests of their members; my job is to think what is best for consumers. We do not take a view as to whether the public or private sector is best; we take the view that we need a good standard of service, whether in the private or public sector. The Bill takes Royal Mail private, so I am trying to make sure that safeguards are built in to ensure that consumers do as well in the private world as in the public world. Some aspects of the Bill fall short of that.

Q 196

Andrew Stephenson: May I pick up a point of clarification on some of the research that you have talked about? When you talk about “consumers,” does it relate to mail sent from private individuals to other individuals or businesses, because ordinary letter business is only 5% of what Royal Mail do? Or is “consumers” a much broader term?

Robert Hammond:  It is a broader term. In fact, the research fell into three parts. There were two parts that Postcomm and ourselves did jointly, which were on domestic consumers and small and medium enterprises, and Postcomm did a supplemental piece of research along much the same lines for bulk mailers. So we feel that we probably have a snapshot here of something that covers everybody’s interests.

Q 197

Andrew Stephenson: Obviously, the interests of each different group of consumers will diverge slightly, so I just wanted to clarify that. Returning to the post office network, it is estimated that about 7,000 branches are currently economically unprofitable. Do you believe that if the Government, in addition to the provisions in the Bill, looked rigorously at involving credit unions and other ways of making the network profitable, all 7,000 could, one day, become profitable? Or do you believe that a further contraction of the network is inevitable?

Mike O'Connor:  We believe that post offices provide a vital social function, and we have to look at the value of the institutions of post offices for their communities. We don’t think that decisions can be purely driven by a simple profit and loss account on that particular business. That said, we shouldn’t write an open cheque to post offices. We have a duty to taxpayers to ensure that if they don’t run at a profit, the loss they make is as small as possible, and hopefully there will be some element of cross-subsidisation, because there will be some post offices that it may be impossible to get to make money.
But we believe that we should maintain our post office network in the interests of social cohesion, in the interests of providing public service and in the interests of giving people access to essential services, especially in rural areas and especially for those who don’t have easy access to other forms of service. So we think that we should maintain them, but we should seek business models that keep the burden as light as possible. That’s why we are doing research on the new Post Office Locals, which we feel are a very important step forward in getting greater accessibility and more viability.

Andy Burrows:  Of course, one of the strongest assets of the post office network is the fact that it offers universal reach—that it is out there in rural and remote locations. The distribution of the network, not just the overall number of branches, paints a convincing case in terms of why it should be the post office network that should be delivering services of general economic and social interest. Indeed, it is precisely on that basis—the universal reach, being able to access the range of services—that the Government currently provide subsidies, and it is entirely appropriate that those subsidies should continue for as long as that would be necessary.

Q 198

Andrew Stephenson: Have you done any research on what one aspect in particular consumers most value about the Post Office? Is it face-to-face? Is it universal reach? Or is it a spectrum of different issues?

Andy Burrows:  We are currently undertaking some research, which will be published shortly, on Post Office Locals, as Mike just suggested, but as part of that research, one of the things that we have tried to do is to determine which attributes consumers do value most highly in terms of the post office network. The two strongest attributes are very clearly convenience, first and foremost, and opening hours. As you go down the list, issues of customer service and of the in-branch experience also feature very strongly, but unsurprisingly, convenience—actually having the local neighbourhood post office close to you—is the thing that consumers value most strongly.

Mike O'Connor:  The other thing, which is less tangible, is simply trust. People trust their post office, and we were disappointed that the Government have dropped plans for a post bank, because we still have 1 million people in this country without bank accounts. The cost of not having a bank account is more than £500, because you don’t get access to the best deals with direct debits with energy companies. There is a premium—if you don’t have a bank account, it costs you an awful lot of money. I congratulate the British banks on bringing that number down, but we still have a hard core of 1 million people. We believe that one of the reasons why people do not take out bank accounts is that they are frightened and they don’t trust the big banks. They do trust the Post Office. So one of the great assets of the Post Office, and one that we must maintain, is that intangible element of trust.

Q 199

Andrew Stephenson: Hopefully, the same objective could be achieved by working more closely with credit unions, rather than a post bank.

Mark Lyonette:  What was attractive to us when Parliament approached us was very much that we knew that our members—already 900,000 people, including 5% of the Scottish population and 20% of the population in Glasgow, now use credit unions. The Post Office is a trusted institution. It just doesn’t have the products that they need. Therefore, we welcome any ways that we can work together to explore how that can be delivered.

Q 200

Richard Fuller: I have a couple of questions for Mr Burrows about maintaining the size of the post office network. You write in the submission about the existing access criteria. Is there a concern that there is something wrong with those criteria? Is that a long-standing issue of concern for Consumer Focus?

Andy Burrows:  The issue is about what the floor looks like in terms of network provision, with the access criteria as currently applied. According to a strict interpretation of those criteria, the network could fall to 7,500 branches. The positive thing about the way in which those criteria are written is that they specify minimum coverage levels by rural, urban and urban deprived areas, and also provide a minimum requirement for postcode district areas. The way in which those access criteria are written, in terms of requiring a minimum distribution across the UK, is positive but this is about the requirements that stem from that, which allow for an overall network that could be smaller than it is today.

Q 201

Richard Fuller: So, if I hear you correctly, it is not a concern about access per se, but about the numbers.

Andy Burrows:  Yes; the network could fall further.

Q 202

Richard Fuller: Do you know where those additional 4,000 that currently exist are located? Are they peppered into urban areas? Do you know whether they tend be ones that are more profitable or the ones that are less profitable, or is it difficult to say?

Andy Burrows:  Clearly, in terms of branches that are probably either not profitable or not commercially viable at the present time without subsidy, you would be looking at the rural network, and probably also at urban deprived branches. Urban deprived post offices typically will have high transaction volumes, particularly of transactions such as pension benefits and bill payments, but those are typically low-margin transactions. So, it’s those areas of the network, which perhaps don’t turn a profit as of now but are tremendously important in maintaining the universal reach, that ultimately are important for Post Office Ltd in terms of procuring new contracts, to be able to sell itself as offering a post office in every community.

Q 203

Richard Fuller: Forgive me, but if it is an issue of numbers—you were asking here for a statutory provision stating a numerical requirement, going beyond the access issue—is it not reasonable to expect that most of those additional offices are in areas where there is already adequate provision in terms of access, and that they are likely to be there because they are actually quite profitable?

Andy Burrows:  The rural criteria would allow for a significant number of rural branches to close, with the access criteria still being met. Obviously, the difference between 7,500 and just under 12,000 is considerable. Obviously that is just a strict interpretation against the criteria, but according to those criteria, a significant number of rural branches could close and the access criteria as currently written could still be met, hence the logic of bolstering, to ensure that the rural network has the additional protection in terms of numbers and distribution.

Jimmy Hood: I am afraid that this will probably have to be the last question.

Q 204

Karl Turner: If the Bill remains as it is, what do you think will happen to the 7,000 non-profitable post offices?

Andy Burrows:  What consumers want is a viable and sustainable post office network in the long term, and so we need to see the products and services that consumers actually want to use at post office branches. We have touched already on banking services, where there is a strong appetite for an extension of the existing product range. We have seen announcements this week of new pilots, with the intention of the Post Office becoming a front office for Government. Those pilots will obviously need to translate into new contracts for the post office network, but new business needs to be put through the network, and in turn Post Office Ltd needs to keep its side of the bargain, delivering first-class customer service and making the customer proposition as flexible as possible. That is what is needed to see a post office network that is sustainable in the long term. Clearly we are talking about a serious challenge. The Post Office Ltd losses have started to—

Jimmy Hood: Order. I am afraid that that brings us to the end of the time allotted to the Committee to ask questions of these witnesses. I thank them on hon. Members’ behalf. Can we have the next witnesses, please?

Witnesses: Jane Newell OBE, Chairman of Trustees, Royal Mail pension plan, and Gerry Degaute, Chief Executive, Royal Mail Pension Trustees Ltd, gave evidence.

Jimmy Hood: Welcome to our meeting. Could you briefly introduce yourselves? Then we’ll get into questions.

Jane Newell:  May I say how pleased we are to be invited to speak about the pension solution? I am Jane Newell, Chairman of Trustees of the Royal Mail pension plan. My colleague, Gerry Degaute, is the Chief Executive of Royal Mail Pension Trustees, which supports the trustees.

Q 205

Gordon Banks: Will you say whether you are satisfied with the pension provision in the Bill, amplifying what the consequences are of transferring the pension fund to the Treasury? Will you also comment on what you think are the reasons for the substantial deficit that exists just now and whether you agree with—dare I say it?—a statement made by the Secretary of State, which I cannot refer to exactly, mentioning poor investments made in the past?

Jane Newell:  Thank you. I wonder if it would be helpful, Chairman, if I started briefly by giving some facts about the plan, because it is quite complex. It is governed by a board of 11 trustees, five of whom are nominated by the employer, including two independent trustees, five nominated by the membership—three from the Communication Workers Union, one from Unite CMA and one pensioner-elected—and the independent chair, appointed by the company but with the agreement of the unions. Sometimes it is helpful just to see how the plan is governed.
There are number of questions, so may I start by explaining the purpose? The trustees’ focus is entirely on protecting the benefits of our members—that is 100% what the trustees do. They safeguard the benefits that our members have been promised.
There are several reasons for the deficit. The main reasons—the principal causes—are longevity, falling bond yields and, at the time of our last formal valuation, specific investment market conditions. Perhaps I can enlarge slightly on a couple of those issues. Longevity is vital to the way that the pension fund is valued. I do not know whether the Committee is aware that we all have been living much longer, which is a good news/bad news story. One year on life expectancy equals 3% to 4% on the liabilities. That is about £1 billion.
In 1982 a man at 60 could expect to live another 16 years. In 2009, that had increased to 22 years. That is a huge difference and illustrates how important that factor is.
Another factor is the markets on the day of the valuation. As I am sure Committee members know, the valuation has to be done on one specific day. Ours, unfortunately, fell on 31 March 2009. In March 2009 the FTSE 100 was about 3,500. It dropped by 45% between May 2008 and March 2009. That made another huge difference. Those are basically the reasons for the pensions deficit at this time.
Another question you asked was about the trustees’ investment performance. The trustees have a very strong investment performance record—very strong. The Secretary of State mentioned that in passing in Parliament, in the heat of discussion, as one of the reasons. I think probably what he meant to say was that one of the reasons could be bad investment decisions—but in this case, it most certainly was not. I wrote to the Secretary of State the next day and pointed out that unfortunately that was an incorrect statement. He very kindly and very courteously replied to me, to say that that would be corrected as the Bill went through Parliament.
Was there another question?

Q 206

Gordon Banks: You haven’t actually touched on whether you are satisfied with the provision for pension provision in the Bill, and what you see as the consequences of transferring the pension fund to the Treasury.

Jane Newell:  Thank you. The trustees support the pensions solution in the Postal Services Bill—there is absolutely no doubt about that—on the basis of the undertakings given by the Government on the face of the Bill and of the statements made to the House during the passage of the Bill through Parliament. What we want is to safeguard the benefits. The undertakings given are very good—we are very satisfied. Provided that those undertakings remain the same at the end of the legislative process, we will be confident.
If the Bill did not happen and there was no pensions solution, we are in a very, very difficult situation. The plan is really unique—it is important for the Committee and the House to understand the uniqueness of the Royal Mail pension plan. We are by far the largest of funded plans in the country, in terms of membership—437,000 members. If you take all the dependants that those members would have, you are probably talking about 1 million people who are affected by the plan. We have a very large deficit—large because we are a very large plan—and a weak employer. We have an employer whose business is shrinking—it is in a shrinking market—and the size of the business is dwarfed by the size of the deficit. And we have a sole Government shareholder.
All of those things make us unique, so we demand a unique solution—we need a unique solution to cope with all that. We are very pleased to see that that is what is in the Bill—provided that the safeguards are there.

Q 207

Gordon Banks: So the arrangements in place just now to pay the deficit off over 37 or 41 years—I can’t remember, but something like that—

Jane Newell:  Thirty-eight years.

Gordon Banks: Do you think those arrangements are unsustainable?

Jane Newell:  This is a difficult question, because if everything goes in accordance with the assumptions that we have made, it should be repaired over 38 years. But this is a huge risk. Many things can happen in 38 years that we cannot foretell, so this is a big risk. Also, we are told, it is not good for the company, because it is weakened by this deficit. Clearly, it is in the trustees’ and the plan’s interest to have a strong plan sponsor.
I don’t know if my colleague has anything he wants to add to that.

Gerry Degaute:  The only part that perhaps we haven’t covered was the consequences—if the solution goes ahead as we see in the Bill. The liabilities of the plan as they are, up to a cut-off point of a date that is not yet announced, transfer to the Government. We are then left with only active employees. In other words, all the pensioners, deferred pensioners and in fact the active employees—the liability at that cut-off date—would transfer to the Government as a consequence. We would be left with liabilities for the employee members only, and with that aspect of their liability that is in respect of their future, such as salary increases, over and above the way it will be revalued by the Government. On that basis, we would be left with assets to meet those liabilities and the future accrual. Our fund will become much smaller, and we will transfer liabilities and assets to the Government.

Q 208

Andrew Stephenson: I am reassured by what you said about protecting existing members’ benefits and welcoming some of the aspects of the Bill. I should like you to touch on the future and whether you have had any discussions with the Government about the assets that will be left with the pension plan. Assuming that the Bill passes into legislation, are you confident that you will be able to meet the cost of the pension obligations for current and future employees who will still be covered by the plan?

Jane Newell:  We have begun discussions. It is very difficult to say at this point exactly what would be left of the ongoing plan because we do not yet know the cut-off date, and it will obviously depend on that cut-off date. We are in discussions. The idea is to leave the plan fully funded. When we know the cut-off date we will then be able to see what liabilities are remaining, so that the plan can be left fully funded. At that point, we would have discussions on which part of the assets should remain with us and which part should move to Government. Has that answered your question?

Q 209

Andrew Stephenson: Yes. I just wanted to see whether you were comfortable with going forward. Obviously, you have said that you are fairly satisfied with the solution being proposed in the Bill for the existing member benefits; it is just really for the sustainability of the pension plan in the future.

Jane Newell:  We believe that it would be sustainable because it would inevitably be a much smaller plan. We do not know its size exactly, but we are probably talking about 10% of the size. That would be much more easily supportable by the plan sponsor because it is much more in proportion to the size of the business. We are satisfied in principle. As I have said before, we are certainly satisfied in principle with everything that we have seen so far, but what we are really focused on is safeguarding the benefits, and that is what we need to focus on for the outcome.

Q 210

Nia Griffith: You mentioned that you would be happy for the Bill to go through, given what is in the Bill and what has been said in the way of statements. Is there anything that you would like to see that would strengthen your confidence in the Bill? Is there anything that would improve the Bill in terms of ensuring that pensions are secure?

Jane Newell : That is a very good question. We want to see the strongest possible undertakings in the Bill. If things are not in the Bill because it has already got to a certain point when that is what it is, then we want to see the strongest possible undertakings in Parliament in Hansard, written there in black and white—“We will safeguard these. We guarantee that these benefits will not be reduced.” Those are the sorts of statements that we want to see. Some of them have already been made, and that is very helpful. The other day, the Secretary of State said that this Bill
“will ensure that all the benefits that employees have earned will be safeguarded.”—[Official Report, 27 October 2010; Vol. 517, c. 359.]
We want to hear that said again, as many times as possible—that the benefits will not be reduced, that our members will get the same as they would have had the plan not been transferred to Government.

Q 211

Nia Griffith: Am I right in understanding that there are some people who will end up with a pension that takes a bit from one pot and a bit from another point because of the cut-off date to contributions? How will we ensure that that is managed effectively?

Jane Newell:  Yes, exactly. It sounds terribly complicated, but we hope that it will not be. Existing employees will have their benefits earned to the date of transition in the Government scheme and the future ones in the plan. What we would like is a seamless member experience. We are working with the Department on that. We have ideas as to how that could be maintained. It could be very confusing for our members if they get a benefit statement from some people and another one from somewhere else. It could be confusing. We should like it to be a seamless administrative membership experience. That is what we are hoping to cover in our discussions with the Department.

Q 212

Nia Griffith: Does that need to be in the legislation?

Jane Newell:  I think that that is a question for Government. I do not know whether it needs to be in there. Certainly, it would be very nice if it was said in Parliament that Government are going to ensure a seamless member experience. Those are words that we would certainly welcome hearing.

Jimmy Hood: If Members have no further questions for the witnesses, that brings us to an end of our evidence session this morning.

Ordered, That further consideration be now adjourned.— (Mr Davey.)

Adjourned till this day at One o’clock.